UPDATE 2-Alcatel halves net loss as turnaround strategy kicks in

* Enterprise business to be sold to Chinese investment fund
(Adds share price reaction, regional details)

By Leila Abboud and Gwénaëlle Barzic

PARIS, Feb 6 Alcatel-Lucent almost
halved its net loss for 2013 as cost-cutting, a tweaked product
offering and asset sales under Chief Executive Michel Combes
began to take effect.

The telecoms equipment maker, which competes with Sweden's
Ericsson, China's Huawei and Nokia's NSN
unit, said its gross margin was 34 percent and
operating profit 307 million euros - both better than expected.

The group posted its first quarterly profit since March 2012
and in the fourth quarter operating margins went to 7.8 percent
from 2.8 percent in the last quarter of 2012.

Alcatel shares rose 9.5 percent as investors bought into the
operational momentum that Combes has built two quarters into his
'Shift' plan, which includes 1 billion euros in asset sales, 1
billion in cost cuts, and 10,000 layoffs through 2015.

Some of the spike was due to short sellers covering their
positions, traders said. According to Markit data, 9 percent of
shares were out on loan to investors betting against the group.

"The plan is already deeply transforming the company and
comforting our view that we have made the right strategic
choices," Combes said on a conference call on Thursday.

He also confirmed his target of making the group cash flow
positive and sustainably profitable by 2015. But the results
showed there was still some way to go on that front.

Fourth-quarter revenue at 3.93 billion euros ($5.32 billion)
missed analysts' expectations by 5.5 percent. Its net loss was
1.3 billion euros, compared with the 2012 loss of 2 billion,
caused largely by writedowns on the mobile business and
restructuring costs from layoffs.

It also again used more cash than it made, taking free cash
flow to a negative 636 million euros. It has not been free cash
flow positive since the merger that created it in 2006.

Alcatel-Lucent's woes stem from intense competition not only
from low-cost Huawei, but also from Nokia's NSN, which has
signalled it will compete agressively for contracts this year as
it emerges from a painful restructuring and needs to grow its
top-line.

FORTRESS U.S.

In mobile network gear, Alcatel-Lucent struggles as the
fourth largest vendor and relies on its stronghold in the
high-margin U.S. market, while in broadband and IP it is a
leader and is even increasing market share in some product
areas.

The fortress of its North America business, which grew
almost 14 percent last year, is protected by Chinese vendors
being largely excluded due national security concerns.

Combes' strategy is to streamline the group to focus on IP
networking products, which help telecom operators carry mobile
data traffic, and on high-speed mobile and fixed broadband.

He has also shored up the group's finances with a capital
increase and refinancing debt.

He has sold two businesses units in recent months worth some
350 million euros. The latest deal, announced on Thursday, will
see Alcatel sell 85 percent of its enterprise business, which
sells communications products and services to corporations, to
investment fund China Huaxin.

The transaction, which has yet to be finalised, prices the
unit at 268 million euros on an enterprise value basis. China
Huaxin, which is already partnered with Alcatel in its Chinese
joint venture, will take on all its employees and contracts.

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